How to Create A True Property Owning Democracy through The Privatization of Temasek and GIC

In my last blog post (see here) I pointed out that since 2009 I have advocated the privatization of Temasek and GIC and the distribution of shares to Singapore citizens. This was also a plank of the Reform Party manifesto in GE 2011 (see here). Naturally there has been a lot of interest in this idea, if not controversy, including an attack by some YPAP activists back in 2009. Most of their criticisms were simplistic and easy to answer.

However there has continued to be a lot of interest in the mechanics of how such a privatization might be achieved and how the shares would be distributed. Recently an anonymous commentator asked posted this question on TRE:

Kenneth, what about future generations of Singaporeans? How does it work? Every Singaporean gets one share? How?

This article attempts to address these questions.

But before then I would just like to answer the question as to why I am proposing privatization in the first place.

The most fundamental reason is transparency and accountability. Temasek’s charter says it aims to “create and maximize risk-adjusted returns over the long-term”. There is no definition of what long-term means. GIC merely says that its objective is to deliver “good long-term returns for the government” which is defined as “good long-term returns for the Government – a reasonable risk-adjusted rate above global inflation over a 20-year investment horizon. “As any economist knows “investing for the long-term” can be used to cover a multitude of sins. Almost any period of poor performance can be explained away by saying that it is temporary. Without the discipline and transparency of a market listing and need to provide full information to investors there has to be the suspicion that management will seek to enrich themselves and/or tolerate poor performance. I wrote about these issues and the need to privatize Temasek in particular in my blog post, “Chesapeake Energy and Temasek: A Tale of Two CEOs and Shareholder Democracy”where I said:

It is instructive to contrast the power of shareholder democracy in shining a spotlight on management conflicts of interest and excessive compensation with our own powerlessness in finding out what is the real picture at our own sovereign wealth funds. Of course an incorruptible government ensures that there is no egregious wallowing at the corporate trough, like the shenanigans at Chesapeake, even though the PAP elite believes it is not in our interests to be told very much of what is going on. Even our (s)elected President has little power, and seemingly little interest, in keeping an eye on the investment performance of our SWFs, despite his choice of a pair of spectacles as his electoral symbol.

And also:

“…as a first stage to transparency and the privatization of our SWFs we need to separate the stakes in domestic companies from foreign investments. Temasek should be split in two. In fact if it had been a listed company in the US, for instance, management would have taken that route in order to raise shareholder value. With the split, the market is likely to value the two successor companies as a whole more highly than the original. This is because of the improved management focus and transparency resulting from the split. As a rule investors prefer to construct their own bundles of different businesses rather than have to invest in a company where management have made that choice for them.

Another reason for privatizing and listing Temasek and GIC is so that management compensation and incentives can be made transparent. Shareholders can check whether the incentives of management then are in alignment with the objective of increasing shareholder value. If there is excessive compensation for mediocre performance, then shareholders can vote against management at the AGM just as at Chesapeake. In the last resort they can vote with their feet by selling their stock which is why companies with poor corporate governance trade at a lower multiple than similar companies, ceteris paribus.”

As I explained in my last article, “Has Temasek Found A Cure for Balding”the lack of information and the valuations placed on assets that the government has injected and continues to inject into Temasek leave large question marks over the true track record of the managers. There is no reason for this excessive secrecy. After all look at Berkshire Hathaway, Warren Buffet’s investment vehicle, which is around the same size in terms of net assets which publishes quarterly and annual reports as required by the US Securities and Exchange Commission with exhaustive explanations of its accounting policies. Having to release so much information has not affected its ability to generate returns.

Both Temasek and GIC give their shareholder as the Government of Singapore. But the shareholders should be the people of Singapore and the managers should be accountable to the people. This is the rationale for my plan to privatize Temasek and GIC and distribute shares to Singapore citizens. By doing so, together with allowing Singaporeans to own the freehold of their HDBs, we create a true property-owning democracy rather than the fake “porcelain rice bowl” model that the PAP government is so fond of. The 99-year leasehold coupled with the right to move us with inadequate compensation whenever there is a profitable development opportunity is akin to feudal land tenure for the 90% of us who cannot afford private property. In fact it is even worse since there is no asset to pass on to one’s children.

To distribute shares equally to all Singapore citizens would also be a powerful boost to wealth equality without having to resort to redistributive policies on taxation, which by reducing the incentives to work and invest for the most productive may reduce potential output. A rough guesstimate using the deliberately opaque and inadequate information provided in the government’s annual Statement of Assets and Liabilities suggests that this could be potentially worth more than $100,000 per citizen. Obviously with a listing the valuation would depend on the market and the greater the transparency and measurable alpha generated by the managers the more likely the shares would be to trade at a premium to book value. On the other hand if Temasek and GIC’s portfolios are very optimistically marked in terms of valuation and the less liquid the portfolio the lower the market valuation is likely to be.

There are of course a multitude of questions that would have to be resolved. These are some of them together with some possible answers:

How should the shares be distributed? In my view it should be equal shares for everyone though consideration could be given to allocating more shares to those who had done NS as compensation for the economic sacrifice. Of course this might be opposed by women who could justifiably point to the economic sacrifice entailed by child-bearing though most women who have children do so as one-half of a couple. The sacrifice affects both parties. A fairer way might be for Singapore citizens with less than ten years citizenship to be excluded unless they had done NS.

Should shares be given to those under 21 at the time? Probably not on the grounds that they have not made the economic sacrifices that the older generation has to build up the stock of assets. New citizens would not get shares though perhaps consideration could be given to keeping back a certain proportion of shares to allocate to those who had done NS.

What happens to CPF contributions in future that have been a big source of cheap funding for GIC? I have advocated privatizing CPF and making contributions voluntary (while keeping their tax deductibility). Even with the endowment effect of cheap CPF borrowing GIC’s performance has been lamentably low (see link).

What would happen to future government surpluses? There is no reason for the government to run surpluses once an adequate level of reserves has been reached. Of course if and when shares in our SWFs are allocated to citizens there may be a period of adjustment during which the government would have to run a bigger budget surplus to offset additional spending by the private sector as it adjusts its stock of financial assets to the desired level rather than the artificially high one imposed by government. Budget surpluses could be invested in the SWFs and the new shares created held back to reward new citizens who had done NS or children of existing citizens.

Is there not a risk that Singaporeans would just squander their new wealth or be cheated by unscrupulous individuals with inside knowledge? Privatization and the distribution of shares in state-owned enterprises was given a bad name in the former Communist bloc. The selling off of state assets cheaply to the former managers of the companies with the use of loans from state banks helped create the class of Russian oligarchs who became billionaires literally overnight. However in this case the problem would be avoided as there is no requirement for the state to raise money through privatization. Instead shares would be distributed equally. Some Singaporeans might want to see some sort of vesting process imposed to ensure that Singaporeans could not squander their new-found wealth. However such fears are undoubtedly ill-founded as well as being patronizing and elitist It is exactly the same kind of attitude as the current government has towards our citizen’s rights to know how our assets are being managed and even to know the true extent of the reserves. If markets tend towards efficiency then the share price should broadly reflect the mean value of the probability distribution of future returns. The shareholders would be the best judge of whether the share prices of our privatized SWFs were overvalued or undervalued on this basis.

How would you prevent foreigners gaining control of Singapore’s crown jewels by buying up the shares held by Singaporeans? Firstly most of Temasek’s domestic investments are not in high technology areas but in mature industries. Temasek has sold several of the companies in its domestic portfolio to foreign buyers in the past. It is difficult to argue why the management of a privatized Temasek should not be able to recommend a bid by a foreign company for any of its assets or even for Temasek itself and why Singaporeans should not be free to accept. Adequate safeguards could be put in place by requiring any takeover offer from a foreign company for a Singaporean company above a certain size or in a strategic sector to require approval from a Committee on Foreign Investment (like CFIUS in the US or the FIRB in Australia). It should also be coupled with a strengthened competition regulator given that Temasek holds many quasi-monopolies in the local market.

These are a few thoughts on the issue. I advocated privatizing Temasek and GIC primarily to impose transparency and accountability on the management through the discipline of the market. There would be a transparency premium to the valuation. Distributing shares to Singaporeans would also establish a direct nexus between our citizens and the managers of our reserves and give them the power to replace them in a direct manner as opposed to the indirect method of having to replace the government. At the same time it would give ordinary citizens a significant endowment which would greatly reduce inequalities in the distribution of wealth and thus contribute to much greater equality of opportunity. This would be along the lines suggested by Rawls, the American philosopher, in his later ideas on the creation of a property owning democracy. Given that Singapore’s state should already be wealthy enough to provide everyone with significant property assets, the conflict and loss of economic efficiency resulting from redistributive taxation could be avoided. My ideas may be too radical, even heretical, for the current orthodoxy that state capitalism works best. However Singaporeans can increasingly see that the current model has failed to raise living standards significantly for the past decade or more. My hope is that this will start a debate and I look forward to your comments.

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Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism.
I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions.
The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work.
The Right and the Conservatives hate me because I'm a liberal.
I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore.
I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian.
I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean.
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With regards to your article on the privatisation of both Temasek and GIC, I note certain solutions and process which you (KJ) are suggesting the Singapore government implement in order to “create a true property owning democracy”. While I like the idealism of such an idea, I am afraid that practically, it is unrealistic. And I give you the reasons below.

I will of course, focus on the answers to the questions you broached and add a few of my own.

The figure you give shows that every citizen would have a claim of up to $100,000. While this figure itself is disputable and extremely subjective, as you have stated yourself, let me bring your attention to the crux of the issue. Will the issuance of such a huge and nominally equal sum of money to every citizen in the country really make the lives of the general population better? Based on comparative analysis, the relative wealth of citizens in the country will remain equal. There is no net benefit between me and my neighbour since we are both receiving the same amount. On a ceteris paribus assumption, I would be no better off.

The injection or rather, distribution of such a huge amount of shares to the public will also result in the need to increase the monetary base/supply of SGD substantially. I assume that cumulatively, GIC and Temasek as a whole will be worth around 500 billion SGD. The distribution without payment of such shares will result in sudden inflows of apparent “wealth” that increases the total market capitalisation of SGX listed companies by up to 55%. But the money to purchase or even sell such shares has to come from somewhere. This will lead to two possibilities; inflation as money “earned” from sale of distributed shares are pumped into the economy or plunging prices as supply of such shares outstrip demand for it, making those who sold their holdings first more advantaged (so much for democracy) since transactions are carried out on basis of price and first come first serve.

Your comment on the government no longer required to make budget surpluses or even balance the budget is perhaps extremely irresponsible. There is little need for me to point to the problems in Eurozone countries as well as USA as evidentiary support for my stand. In addition, your comment on the government investing possible surpluses into SWFs also brings a moral issue to the table.

Whether you like it or not, government money in any entity means that that particular institution has been given an unquantifiable asset of implicit sovereign guarantee. In this case, will the SWFs be considered private corporations or mere Government Sponsored Enterprises? GSEs have shown throughout history to be less than prudent in their finances, regardless of whether they are publicly traded or not. So much for transparency that comes with a stock listing..

The other questions that you are merely scratch the surface. I would like to pose a few of my own questions which I hope you can answer.

1) What happens if those former SWFs meet insolvency issues in the future? Should the government backstop them or let them fail, keeping note of their huge presence in the markets?

2) Is the securities market in Singapore liquid enough to sustain such a listing?

3) Will the government regulate the company or allow is to determine its own risk profile?

4) Who will lead the former SWFs? A government appointee or member of the general public?

5) Should the incumbent government issue a set of guidance, directives or risk parameters to the company?

I do, however, feel that you dismiss the temptation many Singaporeans will face to cash in their new found wealth rather too easily. Many will rationalise it as the need to meet urgent expenses on healthcare or education or simply to pay down debt. Or perhaps just to go on a cruise. Not everyone, especially the young, will take the long-term view and I am not being patronising when I say this.

So, although this is a good idea in principle, some sort of lock-in period or bar on the percentage of shares that can be sold in any one year might be necessary. This will also prevent the cornering of shares and the emergence of local oligarchs which can happen all too easily, given the amount of wealth that is already sloshing around in Singapore.

I do think it is patronizing and paternalistic to believe that ordinary people cannot manage their own wealth. However I did say that we could have a vesting period or lock up with Singaporeans being prevented from selling the shares for a certain number of years. We might want to consider also whether emigrants should be allowed to keep the shares or should be required to return them if they had not stayed in Singapore for a minimum period.

This is a bad idea. We need to vote in a honest government that put in proper checks and controls and transparencs not privatisation of national assets or funds. Privatisation are subjected to manipulation by management.

The idea is that once they are listed and Singaporeans are shareholders that we can keep an eye on any rent-seeking behaviour by management and ensure that a) we know what the true performance is and b) management only get rewarded for true performance. It is ludicrous to hope that you will get an honest government that will decide to regulate itself without pressure from the people. There is Jefferson’s quote:

“The two enemies of the people are criminals and government, so let us tie the second down with the chains of the Constitution so the second will not become the legalized version of the first.”